Question

    To study the trends in a firm’s cost of goods sold

    (COGS), the analyst should standardize the cost of goods sold numbers to common size basis by dividing COGS by: 
    A Assets Correct Answer Incorrect Answer
    B Sales Correct Answer Incorrect Answer
    C Net Income Correct Answer Incorrect Answer
    D Equity Correct Answer Incorrect Answer
    E Liabilities Correct Answer Incorrect Answer

    Solution

    Common Size statements normalize balance sheets and income statements and allow the analysts to more easily compare performance across firms and for a single firm over time. A vertical common-size balance sheet expresses all balance sheet accounts as a percentage of total assets. With a vertical common-size income statement, all income statements are divided by sales.

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